The U.K. general election is just a week away, and forecasts for how the June 8 vote will turn out have left the pound twisting in the wind.
Could the election also rock stocks worldwide?
There’s not much chance of that, according to strategists. But in the unlikely event of a big flop by the governing Conservative Party, there would be a selloff for U.K. equities or even for markets around the globe, they say.
We’ve kind of seen that British movie before. It was just last June that markets from the U.S. SPX, +0.14% to Asia ADOW, +0.06% tumbled in the immediate aftermath of the U.K.’s vote to leave the European Union, though they went on to shake off Brexit worries and rally to new highs.
This June’s vote is also all about leaving the EU. Prime Minister Theresa May said she called the election to make sure the British parliament is not divided as the country kicks off exit talks with the trade bloc’s other 27 nations.
But the pound GBPUSD, +0.0776% fell to its lowest level since mid-April on Wednesday, hit by worries that May’s gambit might backfire.
Sterling’s slump came as a YouGov projection indicated the election could result in a “hung parliament,” where no party has a clear majority. The model suggested the opposition Labour Party, led by Jeremy Corbyn, could add almost 30 seats in the legislative body and the Tories lose 20, wiping out their advantage.
With that in mind, here are what market strategists think are the worst-case, best-case and mostly likely scenarios for global equity markets.
The nightmare scenario for stocks worldwide
The worst case for stocks worldwide would be the Labour Party winning the election, either outright or at the head of a coalition, said Colin Cieszynski, a Toronto-based chief market strategist for CMC Markets.
“Labour’s far-left, out-of-the-’70s program could create economic uncertainty and send global stocks into a tailspin,” he told MarketWatch. “As we enter the weaker season of the year for stocks, which runs through mid-October, it wouldn’t take much to tip over the current house of cards.”
In this scenario, the U.K.’s FTSE 100 UKX, +0.25% might end up as a bright green spot in a sea of red. That’s because the British benchmark tends to benefit from a falling pound, as the weaker currency boosts the foreign-denominated profits made by the index’s multinational companies.
The pound “may trend the same way as indices outside the U.K., and the FTSE could break ranks and go the other way,” Cieszynski said.
Other strategists expect pain for British stocks if Corbyn’s party makes a strong enough showing to go into government — but not a global selloff.
“If the Labour Party unexpectedly wins next week, then we would expect to see a sharp shock in the U.K. stock market, as Corbyn’s tax-and-spend plans could hurt the U.K. corporate environment,” said Kathleen Brooks, a London-based research director at City Index.
“We don’t think that the outcome of the U.K. election will have a meaningful impact on global equities,” she told MarketWatch. “It is likely to have a localized impact only.”
The chances of leftist veteran Corbyn taking the helm of state seemed pretty slim in April, when May decided to call an out-of-cycle “snap” election. The Conservatives looked set for a landslide win, as opinion polls put them ahead of their main Labour rivals by 20 percentage points. But that lead has since faded to a gap of just 3 points, the latest research shows.
The best-case outcome for global equities
You might not want to count on a stock rally even if May and her Tories do triumph.
Cieszynski sees equity markets largely staying steady, if the result is a solid victory for the prime minister’s party.
“The best-case scenario for stocks is a similar or increased Conservative majority government, which could help to shore up support for global indices at current levels, but probably won’t add to gains,” he said.
The most likely scenario — ‘a wasted exercise’
As things stand right now, most analysts see the Tories winning control of parliament, but with a much slimmer majority than was expected a month ago.
Traders might not place big bets, given that prospect.
“This election may not change things in parliament very much, so it could end up being a wasted exercise,” Brooks said. “If this happens, then we think that the market reaction will be muted.”
The City Index team doesn’t think that a vote for the status quo will impact the FTSE 100 in a meaningful way. The economic health of the U.K. is much more important than the election to the market, she said.
Cieszynski also believes that despite the narrowing polls, the Conservatives will prevail to set up another majority government.
“This would likely spark a rally in GBP and a selloff in the FTSE,” he said. “The impact on markets outside the U.K. is likely to be neutral, as this has been expected for some time.”